Question

On January 1, 2017, Dirt Company acquired all of Cat Company's voting stock for $16,000 in cash. assets at the date of acquisition had fair values that are different from reported values, as follows: Some of Cat's identifiable Fair Value Value 3000 11,000 10,000 Book Plant assets, net (20-year remaining life, straight-ine) ldentifiable intangibles that should be capitslized (5-vear remaining life, straight-line) Cat's total shareholders' equity at January 1, 2017, was $4,000. It is now December 31, 2020 (four years later). Cumulative impairment for the goodwill recognized on this acquisition, to the beginning of 2020, is $2,000 Goodwill impairment for 2020 is $500. Dirt uses the complete equity method to account for its investment in Cat Company on its own books. December 31,2020 trial balances for Dirt and Cat appear below Dirt Company Company DR (CR) DR (CR) S 5,000 S 34,800 23,600 (22,000) (15,000) (25,000) (25,000) Cat Current assets Plant assets, net Investment in Cat Company Liabilities Capital Stock Retained Earnings, Jan. 1 Sales Revenue Equity in net income of Cat Cost of Sales Operating Expenses Total 2,500 28,000 (10,000) (2,000) (16,000) (14,000) (400) 8.000 3.500 20,000 4,000 Required: You should use cell references in providing a number or preparing a calculations by referencing the data above. Prepare a. Compute goodwill at acquisition. Make sure I can follow how you developed goodwill b. Prepare the working paper to consolidate Dirt and Cat's trial balances at December 31, 2020. You must designate your elimination entries appropriately C, E. R, O. you answer in the solution area provid C Current eliminate the current year equity method entries E Equity - eliminste the subsidiary's R- Revalue recognize the beginning-of-current-year fair value revaluations O - Write-Off - recogniz ar equity balances e current year revaluation write-offs Your working should be set up like Exhibit 4.1 on page 133, which designates the elimination entries. c. Prepare the consolidated income statement for 2020 and the consolidated balance sheet at December 31, 2020 in good form.

Answer 1

A	Computation of goodwill at acquisition
	Cash paid for acquisition	$16,000
	Less: Net assets of Cat Company	$4,000
	Excess of fair value over book value	$12,000
	Excess allocated to
	Plant assets	($8,000)
	Identifible intangibles	$10,000
	Goodwill	$10,000
B	Consolidation Worksheet
					Consolidation Entries
		Dirt Company	Cat Company		Dr.	Cr.		Consolidated
	Sales	($25,000)	($14,000)					($39,000)
	Equity in net income of Cat	($400)		E	$400			$0
	Cost of Sales	$20,000	$8,000					$28,000
	Operating expenses	$4,000	$3,500	O	$2,500	$400		$9,600
	Net profit	($1,400)	($2,500)					($1,400)
	Retained Earnings, Jan 1	($25,000)	($16,000)	C	$17,600			($23,400)
	Net Income	($1,400)	($2,500)					($1,400)
	Retained Earnings, Dec 31	($26,400)	($18,500)					($24,800)
	Assets
	Current Assets	$5,000	$2,500					$7,500
	Plant assets, net	$34,800	$28,000	E	$400	$6,400	R	$56,800
	Investment in Cat company	$23,600				$19,600	C	$0
						$3,600	R
						$400	E
	Indentifible Intangibles			R	$2,000	$2,000	O	$0
	Goodwill			R	$8,000	$500	O	$7,500
	Total	$63,400	$30,500					$71,800
	Liabilities and Stockholders' Equity
	Liabilities	($22,000)	($10,000)					($32,000)
	Common Stock	($15,000)	($2,000)	C	$2,000			($15,000)
	Retained Earnings	($26,400)	($18,500)					($24,800)
	Total	($63,400)	($30,500)		$32,900	$32,900		($71,800)
C	Consolidated Income Statement
	Sales	(39,000)
	Cost of goods sold	28,000
	Gross Profit	(11,000)
	Operating expenses	9,600
	Net Operating income	(1,400)
	Consolidated Balance Sheet 2020
	Assets
	Current Assets	7,500
	Plant Assets, net	56,800
	Goodwill	7,500
	Total Assets	71,800
	Liabilities and Stockholder's Equity
	Liabilities	(32,000)
	Stockholder's Equity
	Common Stock	(15,000)
	Retained Earnings	(24,800)
	Total Stockholder's Equity	(39,800)
	Total Liabilities and Stockholder's Equity	(71,800)